American Eagle Apparel Stores - PowerPoint PPT Presentation

American Eagle Apparel Stores. By: Nick Cecero. Residual Enterprise Income Valuation Model. This method estimates value using accounting numbers which are readily available as compared to the cash flow-based valuation model. Is this method superior to the DCF Model?

Copyright Complaint Adult Content Flag as Inappropriate

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.

Download Presentation

PowerPoint Slideshow about ' American Eagle Apparel Stores' - neola

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

This method estimates value using accounting numbers which are readily available as compared to the cash flow-based valuation model.

Is this method superior to the DCF Model?

Yes, because instead of using forecasted numbers as used in the DCF Model we are using accounting numbers which allow for a more accurate stock valuation. Also if there are no free cash flows present than the REI Model would be far superior to use as compared to the DCF Model.

Although it is superior to the DCF Model due to not only its use of actual accounting numbers, but also because it anchors in the sense that if a firm changes its accounting methods the value will of the stock or project will not change otherwise the model would not work.

This method demonstrates the central role of the self-correcting nature of accounting.

For example, if a company changes the way it computes depreciation no matter what they choose the project value should be the same.

This is because if there is an excess of depreciation it will lead to a book value (NEA) that is too low. One would argue that the value of the project would by the end be lower than what was previously calculated under the previous depreciation method. But, because accounting is self-correcting once the depreciation has been accounted for it cannot be taken again and the future earnings (EPAT) will be higher by exactly the amount of excess depreciation.

Finite Horizon Period (Terminal Value) – The first five years through 2018 and these are our explicit forecasts of REI.

Period Beyond the Horizon(Continuing Value) – The period from 2019 to infinity. This continuing value as captured by the REI Model will be different from the value that we calculated using the DCF Model. (Enterprise Value will still be the same though)

Additional Notes:

Discount Rate > Growth Rate (Must Hold True)

We will also assume that the growth rate beyond the horizon will be the same as the growth rate in sales of 3%. (Notion is that firm’s growth is driven by its ability to grow sales)